The Employee Ownership Update

Loren Rodgers

July 15, 2013

In Memoriam: Karen Young

It is with great sadness that we report on the death of the NCEO's cofounder, Karen Young. Karen and Corey Rosen started the NCEO in 1981. They had worked together on the U.S. Senate Small Business Committee before starting the NCEO. Karen took no salary for the first 18 months to help the organization get started and, until she left the NCEO in 1992, served as its managing director. For many years, she organized our conferences, wrote for the newsletter, ran the business side of the organization, helped develop new ideas and services, and did anything else that needed to be done. She was deeply dedicated to the organization and its mission. We would not be here today were it not for the work she did.

In 1993, Karen moved home to Louisiana, where she worked in social services. She is survived by her daughter Nikki.

Karen's family has asked that if you wish to make a donation in her name, please make it to either to: National Jewish Health, with a gift in honor of Karen Young restricted for M.A.C. (mycobacterium avium complex) and bronchiectasis research (1400 Jackson Street Denver, Colorado 80206, attention memorial department, or online at www.nationaljewish.org) or to Tirzah International, a global women's organization focusing on helping women and girls out of poverty through microloans and training (142 Ledge Stone Place, The Woodlands, TX, 77382, or online at www.tirzah.org).

Iowa Legislature Approves an ESOP Formation Assistance Fund

The Iowa legislature recently passed a bill appropriating $500,000 per year to help offset the costs of determining whether an ESOP is an appropriate strategy for the business owner, the company, and the employees. The fund will be administered by the Iowa Economic Development Authority with the help of local ESOP experts, including service providers and representatives from ESOP companies. Last year, Iowa also passed a law providing a state-level capital gains exclusion for sellers to an ESOP under certain circumstances. For more information about the fund, read this article in the Corridor Business Journal.

SEC Makes It Easier to Advertise for Investors in Entrepreneurial Companies

On July 10, the Securities and Exchange Commission issued final rules under the JOBS Act to allow both entrepreneurial companies and hedge funds to use general solicitations, such as advertising or blogs, to attract accredited investors (those with a net worth of at least $1 million, excluding their primary residence, or annual income of more than $200,000 in each of the previous two years). Under the rules, companies must use reasonable methods to verify that any investors are accredited. The rules include a non-exclusive list of these steps, but in general, they the issuer to make an objective determination for each transaction whether the purchaser is an accredited investor. Those steps must consider facts and circumstances, such as:

"the nature of the purchaser and the type of accredited investor that the purchaser claims to be;

the amount and type of information that the issuer has about the purchaser; and

the nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering, and the terms of the offering, such as a minimum investment amount."

The new rule was greeted by predictable enthusiasm from potential issuers and equally predictable concern from state regulators and investor watchdog groups concerned about fraud and excessive investment risk. In at least one instance so far, for instance, a supposed beef jerky startup attracted pledges for over $120,000 in investment, despite the fact that the company did not exist.

Cuba Continues Shift from State to Cooperative Ownership

In a rare move, the government of Cuba invited Western reporters, including Americans, to visit the island and report on economic reform: the launching of an experiment in free enterprise in the form of cooperatives. The law, which took effect on July 1, has, according to the government, led to 197 independent businesses, in retail food, construction, manufacturing, and transportation. The cooperatives include some new businesses but are primarily formerly state-owned companies that have been converted. Reporting on the week-long press visit, CNBC reported that the government official in charge of reform, Marino Murillo Jorge, described the goal of the effort as creating "a sustainable socialist society," but noted that, "life has shown us that the government cannot occupy all of the economy." CNBC also reported that it was unable to find or interview members of any of the new cooperatives.

A Hotel in Cambodia Where Employees Think and Act Like Owners

On July 5, National Public Radio (NPR) ran a story about Soria Moria, an employee-owned hotel in Cambodia, just outside the famous Angkor Wat temple complex. The two original owners of the hotel are Norweigians who intend to move back home and decided that the next owners should be the employees. The NPR story covers the transaction and, even more interestingly, the changes in mindset that it created for both employees and the original owners.

Reporter Daniel Zwerdling describes some employee-owners' view of founder Kristen Hansen as a "benevolent monarch." He also describes a company meeting where employees voted to adopt a proposal that Hansen opposed, a watershed moment that created a new feeling of ownership among employees. Bartender Lous Dalish says, "I am one of the owner[s]. So I have the right to choose. I have confidence to express my ideas, to make decision[s]."

Acquiring Companies May No Longer Get Deductions for Options and SARs Held by Target Company Employees

In general legal advice memorandum (GLAM) AM 2012-010 (January 31, 2013), the IRS ruled that acquiring companies will generally not be eligible to take a tax deduction for the spread on stock options exercised pursuant to a change in control. Instead, the deduction would be recorded by the target. The GLAM looked at situations with a short tax year. Under existing practice, the acquirer was able to take a deduction if the deduction was deemed applicable to the next day after the transaction closed. That is important because deductions to the acquirer have fewer limits in a merger, sale, or consolidation than deductions recorded by the target.

In the GLAM, which applied to a specific situation with a triangular merger, the IRS reasoned that the expense (including advisory fees) really was an obligation incurred by the target, and moving the date one day forward or back to change the timing of the deduction was form over substance. While GLAMs do not have legal force, they do indicate IRS reasoning on an issue that may arise in other contexts.

The issue is explained in more detail in a useful article by Todd Reinstein and Ellen McElroy of Pepper Hamilton.